Statement on Wall Street Reform Bill

Dean Baker, co-director of the Center for Economic and Policy Research
(CEPR) issued the following statement on the passage of the financial
reform bill by Congress:

"The final bill passed by the Senate
today and already approved by the House of Representatives will improve
regulation in the financial sector. However, given the severity of the
economic crisis caused by past regulatory failures, the public had the
right to expect much more extensive reform.

"On the positive side, the creation of a
strong independent Consumer Financial Protection Bureau stands out as
an important accomplishment. Such an agency would have prevented some of
the worst lending practices that contributed to the housing bubble. It
will be important that President Obama choose a strong and effective
person, such as Elizabeth Warren, as the first head of the Bureau to
establish its independence.

"The requirement that most derivatives
be either exchange-traded or passed through clearinghouses is also an
important improvement in regulation. However, important exceptions
remain, which the industry will no doubt exploit to their limit.

"The creation of resolution authority
for large non-bank financial institutions is also a positive step,
although the fact that no pre-funding mechanism was put in place is a
serious problem. Also, the audit of the Federal Reserve's special
lending facilities, as well as the ongoing audits of its open market
operations and discount window loans, is a big step towards increased
Fed openness.

"On the negative side, there is little
in this legislation that will fundamentally change the way that Wall
Street does business. The rules on derivative trading will still allow
the bulk of derivatives to be traded directly out of banks rather than
separately capitalized divisions of the holding company. The Volcker
rule was substantially weakened by a provision that will still allow
banks to risk substantial sums in proprietary trading.

"More importantly, there is probably no
economist who believes that this bill will end the risks of
too-big-to-fail financial institutions. The six largest banks will still
enjoy the enormous implicit subsidy that results from the expectation
that the federal government will bail them out in the event of a crisis.

"Also, the fact that no regulators, most
obviously Ben Bernanke at the Fed, were fired for failing to prevent
the crisis leaves in place serious doubts about the structure of
incentives for regulators. Cracking down on reckless behavior by
politically powerful financial institutions will always be difficult for
regulators. On the other hand, if regulators know that failing to crack
down carries no consequences, even when it leads to disastrous
outcomes, we can expect that regulators will have a strong bias toward
ignoring reckless behavior.

"It is possible that Congress may
eventually take stronger steps toward restructuring the financial
sector, most obviously in the context of a financial speculation tax.
While this was not included in the Dodd- Frank bill, in the context of
severe budget pressures, a tax that can raise $150 billion a year in
revenue may look more appealing than most alternatives. Such a tax would
do far more to restructure the industry than this financial reform
bill."